With the 99% of second quarter earnings reports for the S&P 500 now in, I can update my quarterly analysis of earnings and estimate trends through the 2nd quarter of 2015.

Second quarter’s results improved over Q1 as activity rebounded following the exceptionally cold winter season. For the quarter, operating earnings rose from $25.81 per share to $26.14 which translates into a quarterly increase of 1.28%. More importantly operating earnings FELL from 29.60 per share in Q3 of 2014 or 11.69% from the peak. 

While operating earnings are widely discussed by analysts and the general media; there are many problems with the way in which these earnings are derived due to one-time charges, inclusion/exclusion of material events, share buybacks and accounting gimmickry to “beat earnings.” (For a complete discussion read “The Earnings Season Scandal.”)

Therefore, from a historical valuation perspective, reported earnings are much more relevant in determining market over/undervaluation levels. On a reported basis, earnings improved from $21.81 to $22.80 or 4.54% from the first quarter. But as with operating earnings, reported earnings fell 17% from their Q3 peak in 2014.

The rise in both operating and reported earnings for the quarter brought trailing twelve months operating earnings per share to $108.30 which was down from $111.50, a 2.87% decrease. Trailing twelve months reported earnings fell by $4.34 from $99.25 to $94.91, a decrease of 4.37%.

Importantly, the decline in quarterly earnings is consistent with the disinflationary and weak economic underpinnings that have been exacerbated by the collapse in commodity prices, particularly oil. 

Always Optimistic

There is one commodity that Wall Street always has in abundance, “optimism.” When it comes to earnings expectations, estimates are always higher regardless of the trends of economic data.  The problem is that the difference between expectations and reality has been quite dramatic.  In a recent missive entitled the “4 Tools Of Corporate Profitability” I stated: